Question

Phatboy Motorcycles, Inc., a motorcycle manufacturer, included the following note in its annual report:
The Company self-insures its product liability losses in Canada up to $2.5 million. Catastrophic coverage is maintained for individual claims in excess of $2.5 million up to $25 million.
1. Why are product liability losses considered contingent liabilities?
2. How can a contingent liability become a real liability for Phatboy Motorcycles?